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Thursday, November 28, 2013

Five years into the apocalypse

This isn't quite 900 posts, but it's close enough for a celebration. So, for your Thanksgiving reading, let's take a look back.
"Gentlemen, you have come sixty days too late. The depression is over."

–HERBERT HOOVER, June 1930, in his dismissal of a delegation of public-spirited men who urged an expansion of public works to ease the plight of the unemployed

As we end November 2013, we should note that it has been five years since the economic meltdown in 2008 that threatened to topple the world's economy. And, depending on how you measure it, the global maximum of petroleum extraction was achieved in either 2006 or 2007. That means any way you slice it, we are at least five years into the post-peak oil world.

In the years leading up to 2008, there were a lot of predictions of what would happen in the event of Peak Oil and a financial crash. Books like 2003's The Long Emergency made some pretty drastic predictions, as did various Web sites by Matt Savinar, Jay Hanson and others. Sites like The Oil Drum and Energy Bulletin were among the earliest sites to deal with it in a systemic way.

But now that we're actually in the crisis, and five years in to boot, we can actually look at the results and test them against the predictions that were made. Based on my entirely unscientific reaction, I would argue that the arguments made by Peak Oil were about half right. Those who claimed industrial civilization would be abandoned, that we would revert to the Stone Age, that there would be a massive die-off (on the order of billions), that economic growth would end forever, or that the global economic system would permanently crash have been proven wrong. Modern industrial society is still going, growth is still occurring, albeit mostly in developing countries, the U.S. government is still functioning (barely), and Wall Street is still raking in billions.

However, many predictions were clearly closer the mark. The U.S. economy is mired in permanent stagnation, with rapidly deteriorating living standards for the majority of citizens. Some states, particularly in the Eastern Mediterranean, are in a state of what can only be described as outright collapse, with medicine unavailable to hospitals, 25 percent unemployment, burning trees for fuel, riots in the streets, bank accounts being seized, and in some cases revolution and civil war. The U.S. and Canada are frantically exploiting low grade sources of fuel - "tight" oil, shale oil, tar sands, and the like, including destroying fragile groundwater supplies with fracking and pipelines. We are indeed going after the low-quality, hard-to-get stuff, just as Peak Oil predicted, and prices are indeed high as a result. However, at present, there is enough low-quality stuff to keep things limping along for now.

So let's look at some of the predictions of Peak Oil made in the late nineties and early twenty-first-century and test them. We have passed the realm of theory and are now in the realm of reality, so we no longer have to speculate, five years in we can actually see what the results are:

The Economy:

1.) Society is fraying around the edges. In 2012, real median household income was 8.3% lower than in 2007. Median family income is lower than it was in 1989. Adjusted for inflation, wages have not increased in forty years. Unemployment is rampant, and the workforce participation rate is what it was in the nineteen-seventies, before women entered the workforce en masse. This is constantly being rationalized to the public by politicians and the media as "the new normal." Mainstream economists soberly talk about permanent damage to the economy in terms of economic output, job growth, incomes, career prospects for graduates, and the like. Some more radical economists have openly warned of the end of growth and permanent stagnation.

The 400 wealthiest Americans are worth a record $2.02 trillion, roughly equivalent to the GDP of Russia. That is a gain of $300 billion from a year ago, and more than double a decade ago. The average net worth of list members is a staggering $5 billion, $800 million more than a year ago and also a record. The minimum net worth needed to make the 400 list was $1.3 billion. The last time it was that high was in 2007 and 2008, before property and stock market values began sliding. Because the bar is so high, 61 American billionaires didn’t make the cut.

3.) Despite exploding poverty, mass foreclosures, tent cities, and college graduates living at home, most of the political discussion centers around ways to cut and/or dismantle the social safety net erected during America's years of prosperity. Poverty is being criminalized, the poor are being demonized and hustled out of America's gentrified cities. The Republican party voted to cut food stamps in the midst of mass unemployment, even as they preserve and enhance subsidies to wealthy farmers. Currently, fear of the debt is being used to make "hard choices" and a "grand bargain" to reduce or curtail Medicare and Social Security benefits, even with taxes on wealth at historic lows. The rich and powerful, in fact, continue to become wealthier with every passing year, even as society falls apart around them.

4.) The suburbs are still there, and the American way of life still centers around driving. However, poverty in the suburbs is exploding. There is talk of suburbs becoming the new slums ('slumburbia'), while vibrant, walkable cities like New York, San Francisco and London become the exclusive property of the one percent due to extraordinarily high property values. Miles driven has decreased for the first time ever, and the average age of cars on the road is at an all time high. There are signs that driving is losing popularity among the young as a rite of passage as it becomes less and less affordable due to insurance and high gas prices. Empty strip malls and foreclosed houses dot the countryside, even as new ones are being constructed in an attempt to find places for the wealthy to invest their exaggerated fortunes.

5.) Municipal bankruptcies are occurring all across the country due to deindustrialization, eroded tax bases, political corruption, and unpayable pension obligations. The only jobs in much of middle America are health care or education jobs, or poverty-wage McJobs of stocking shelves and operating a deep-fryer. Then there are tattoo-parlors, drug-dealing and prostitution. Education costs have made an entire generation into debt-serfs.

6.) Some have predicted a collapse of "large-scale global economic
institutions," and a subsequent return to local economies. There has
been no real sign of this trend however, and economic power continues to
accrue to large, multi-national global corporations, which concentrates
power and wealth in fewer and fewer hands. The overall economy is still
dependent upon these large-scale institutions, which exert ever greater
control over the wealth and politics of the global economy (the recent
TPP treaty is an example of this). Small businesses continue to
struggle, although they are still significant especially in large to
medium-size cities with healthy economies. Much of the efforts to encourage small businesses and local economies are exhortatory rather than done out of absolute necessity.

7.) Jobs are disappearing rapidly. A panoply of techniques has
created an unprecedented surplus of labor, driving down wages for people
who are not in the investor class, superstars, or well-connected. These
include 1.) Automation, which includes things like scanners, barcodes,
artificial intelligence, networks, online shopping, bots, self-checkout
and self-service, software, in addition to "conventional" robots, 2.)
Offshoring and deindustrialization - sending manufacturing jobs to China
or Mexico and IT and customer service jobs to India, and 3.) Onshoring
(H1-B Visas, mass immigration from Mexico, etc.). Globalization means
being able to hire and exploit workers anywhere on earth who are willing
to anything for the shrinking international pool of jobs, and
corporations now have larger GDP than many nation-states, and more
control over the world's economy. No coherent plan exists to solve this
musical chairs scenario - the unemployed are simply dismissed and
demonized as stupid or lazy and written off.

8.) The economy has not, however, "collapsed." Falling apart happens one family at a time, one city at a time, and has not been enough to galvanize any major resistance or any consensus on what is happening to us. Surveys consistently indicate the while people believe that society is indeed falling apart, they think it will not affect them, or they will somehow escape the effects though more education, hard work, luck, or something else. Many Americans still seem to think that things will somehow "get better" in future, and that our problems are just temporary. Others simply think that the "free market" will solve all problems, and that we just need to "get government out of the way," despite the fact that the free market has clearly decided that all consumer goods are to be made by Chinese peasants and most Americans should be paid minimum wage.

9.) While intelligent, thoughtful governance and prudent political measures could help us get through these turbulent times, political dysfunction and polarization is the order of the day. Radical political movements like the Tea Party, funded by a small group of libertarian plutocrats and the oil industry, have blocked public transportation and alternative energy efforts, and have demonized and scapegoated the poor and minority groups, even threatening to default on the nation's debt rather than expand access to health care.

10.) Some have predicted that as oil prices rise, it will become less economical for U.S. companies to import from abroad, and for this reason (along with rising Chinese wages), there will be a return of manufacturing jobs to North America. There is some evidence that this is happening, however, it must be noted that 1.) the wages of manufacturing jobs are a fraction of what they used to be 2.) the number of manufacturing jobs continues to decline as a percentage of the workforce even with onshoring due to automation and efficiency measures, 3.) These jobs require skills that are hard to acquire, and 4.) Many of these jobs are coming to Mexico and Latin America, not the U.S.

Climate:

1.) Superstorms are, in fact occurring on a regular basis. At this writing, Typhoon Heian has struck the Philippines. Last year, "superstorm" Sandy plowed into New York city, the United States' most populated urban area, several years after Hurricane Katrine "drowned" New Orleans. Tornadoes have ravaged the Midwest and drought the desert southwest. Again, there are many isolated incidents, none of which can be directly attributed to climate change, preventing a clear picture from forming given natural weather variability from year to year. Most people are used to variation in the weather and climate and tend to dismiss it as just the way things are, even as once-in-a-hundred-year storms are occurring every single year.

2.) Addressing climate change in any coherent way has proved impossible. Well-funded think tanks fund climate denialists and sew doubt and confusion among the public.America's corrupt politicians have been completely purchased by the oil industry.

5.) International supply chains have been disrupted by weather events.

6.) Crop yields have not, as yet, fallen off a cliff or declined significantly. However, there is good evidence that climate change will effect crop yields in the future. The extent is still unknown however, as is our ability to adapt. There is good evidence that a price spike in grain prices was a root cause of the "Arab Spring," a series of revolutions across North Africa. The results of those actions have been in many cases, outright state failure in the case of Libya and Egypt, joining other failed states in the Middle East such as Afghanistan and and Iraq. Future spikes in grain prices due to drought or speculation are expected to produce more of this in the future. A prominent U.S. Navy admiral has called climate change the biggest threat the the country's national security:

Despite renewed threats from nuclear North Korea, missile stockpiling in China and a standoff between China and Japan over a small string of islands, the head of the U.S. Navy’s Pacific fleet has declared the greatest threat to long-term peace in the region is climate change.

Fallout from the shifting global temperature "is probably the most likely thing that is going to happen ... that will cripple the security environment, probably more likely than the other scenarios we all often talk about," Navy Admiral Samuel J. Locklear III told the Boston Globe's Bryan Bender on Friday.

8.) Concerns about overfishing and a mass die-off in the world's oceans appear to be coming true. The ocean is acidifying, jellyfish are taking over, the plastic garbage patches are growing, and coral reefs are dissolving, in line with the worst predictions. The ocean appears to be warming, glaciers are melting, and sea levels are expected to rise up to four feet over the course of the century, drowning major cities and in some cases entire countries. Species are going extinct at an alarming rate, including recently the black rhino. The thermohalene cycle which warms Europe has not shut down yet, and the "methane gun" of the Arctic Permafrost has not yet gone off, but the danger still remains. For the first time, Arctic waterways can be freely navigated due to lack of ice.

9.) Although not strictly related to climate change, it looks like long-feared concerns about the loss of effectiveness of antibiotics are in fact coming true.

International:

The biggest story here is the "austerity" in Europe. The relations of this to peak oil are somewhat shaky, however. The principal cause appears to be a debt crisis exaggerated by these factors - 1.) Property bubbles, 2.) Bailing out the financial system and the banks, 3.) Countries in the Eurozone no longer being able to devalue their currencies since they are relegated to users rather than issuers of currency. Debt always outruns the ability to pay it, particularly in a downturn where the government's expenditures go up even as the revenue they take in declines due to lowered business activity and production slumps. Debt crises have occurred throughout history, including the Great Depression, so it is difficult to pin on an energy crisis.

Europe's jobs crisis is particularly striking. There are simply not enough jobs for the people actively seeking them. Europe's population is among the most intelligent and educated in the world, yet this is not enough to magically produce enough jobs for people. The United States' job situation is ameliorated by 1.) a manipulated unemployment rate which makes "discouraged" workers magically disappear, 2.) a large amount of sub-minimum wage and part-time work which does not give workers enough to live on, but allows them to be counted as "employed," often subsidized by taxpayers, and 3.) temporary boom jobs created by energy extraction. The U.S's youth unemployment is about as bad as Europe's and this will have knock-on effects for decades to come.

Greece appears to be in a state of outright collapse. Spain and Portugal are not far behind. Then come places like Ireland, Italy, France and Great Britain. Germany seems to be doing the best thanks to their export model and relatively effective governance, although, as some have pointed out, the German export model means that there have been no real wage gains for Germans for a long time as a consequence. Clearly not every country in the world can be an export country, even though this seems to be the only prerequisite for economic success under the current capitalist economic model (can wall all export to Mars?)

Oil:

This is a complicated one. It seems as if peak petroleum was reached in either 2006 or 2007. I say peak petroleum intentionally, because a lot of substances that are considered to be "oil" are not the conventional petroleum reserves studied and discussed by the Peak Oil community traditionally. What we may not have achieved are Peak fossil fuels. The response to Peak Oil was uncertain in a lot of predictions leading up to it, but what we have not seen is a sudden falloff of oil, with pumps running dry and fuel rationed the way it was during the 1970's. Instead what we have seen is the following:

1.) Perhaps most amazingly, growth has not yet stopped. However, "The nature of today’s growth is highly asymmetric between East and West, and highly imbalanced between rich and poor. Today’s growth is also quite lumpy, or highly clustered, as certain domains and regions are benefiting while other populations are living in very stagnant conditions."

2.) We are desperately going after every source of hydrocarbons, no matter now dirty and difficult to extract, everywhere on the planet. Technical innovation and investment has gone into novel methods of fossil fuel extraction rather than renewables where it should be going, because of the perverse incentives of the "free" market. Techniques that were uneconomical such as hydraulic fracturing, deep-water drilling and sideways drilling are now being used thanks to high energy prices. Peak Oil pointed out that the easiest to get resources were used first, and they have been proven correct. Now we're going after lower-grade sources such as the Bakken shale formation in North Dakota and the Alberta Tar Sands. A noted article in April raised the possibility of going after methane clathrates on sea beds as another potential source of hydrocarbons. Potentially, hydrocarbon use could continue to increase even as other resources give way (fresh water, topsoil, phosphorus, rare earth metals, etc.).

3.) While talk of the United States being the next Saudi Arabia by exploiting lower-grade hydrocarbons and natural gas are certainly exaggerated, they have prevented any acute energy shortage crisis, although prices remain stubbornly high, even in a stagnant economy. There is evidence that these fracked wells have a rapid fall-off in production, however, leading to concerns that the reprieve may be very short-lived. Here is a fascinating fact:

The six key shale and tight oil areas: the Bakken, Eagle Ford, Haynesville, Marcellus, Niobrara, and the Permian, account for 90% of domestic oil production growth and virtually all domestic natural-gas production growth in 2011-2012.

4.) We have transitioned away from oil into a variety of other fossil energy sources, most notably natural gas and coal, and to a lesser extent, biofuels (although these are a net energy sink). Renewables, the logical choice for replacing damaging fossil fuels, continue to languish because of free-market fundamentalism and entrenched interests.

5.) In the Western countries, "demand destruction," a euphemism for low growth and the impoverishment of the citizens of North America, Western Europe and Japan, has kept demand for oil in the biggest economies (minus China) in check. Western economies have deteriorated as the international investor class now prefers to invest in developing countries where catchup growth has meant that profits are higher, new markets are emerging, wages are low, and inequality is high - places like China, and parts of Southeast Asia and Latin America. As growth continues in these countries, the citizens of older countries no longer have control over capital, and become poorer and poorer and poorer. Economics and free-trade under capitalism is indeed a zero-sum game with clear winners and losers.

6.) Energy prices are high, and this has had a braking effect on the economy and a depressing effect on the lifestyles of Western consumers, particularly Americans, who are utterly dependent upon oil for their lifestyle. Miles driven is down, those driving vacations during Labor Day have been curtailed, and people are tightening their belts. Cars and highways do not sit abandoned, however.

The Oil Crash is Now Behind Us. Why? Simply put, whereas oil used to be the key commodity on which a fast, just-in-time, high-functioning global economy depended all too much, now a combination of coal, natural gas, and other inputs to the power grid have taken nearly all of the market share over the past decade. It is axiomatic, therefore, that if the global supply of oil has only increased from 74 mbpd (million barrels per day) in 2004 to 76 mbpd here at the end of 2013, but total energy consumption globally from all sources has risen over 20% in the same period, then nearly all the growth in the global economy is being funded by other forms of energy.

So you can abandon the idea there will be a future oil crash – because we already had it. The world has been busily starting to wean itself off oil for nearly ten years now. Oil use in Europe and the United States peaked in 2004-2005. The decline of oil consumption only accelerated after 2008, and in the OECD, it's still declining. Will $125 or $150 oil crash the economies of Japan, the United States, or Europe at this point? Perhaps not. There is hardly any growth to crash in the OECD. It is as if the OECD economies are effectively bunkered, with no growth in wages, jobs, or construction, and nearly all progress is confined to asset prices, mainly the stock market. Perversely, this stagnation is the new strength.

Meanwhile, in the Non-OECD, where growth is actually taking place, the big drive that has taken world energy use higher since 2008 – from 11310 Mtoe in 2009 to this year’s projected 12726 Mtoe – continues to be funded by natural gas, various inputs to the power grid, and the world’s still fastest growing energy source: coal. Yes that's right, coal, which grew 2.5% last year. Again, ecological economics informs us that there must be energy inputs to fund economic growth. Well, the world has plenty of energy inputs in the form of natural gas and coal. There is no Peak Natural Gas and there is no Peak Coal. No crash is coming in either of these resources in the foreseeable future, either.

To give a better sense of the decline of oil and the rise of other energy inputs, consider that in almost every European country now, bicycle sales now outnumber automobile sales. Life After the Oil Crash, indeed! In the United States, oil demand has fallen to levels last seen over thirty years ago. The 5 mbpd of new demand in Asia, built over the past decade, has been supplied more from demand declines in the West than new global production. The real oil crash, now, the oil crash that matters most, is the decline of oil’s share in the total energy mix. A decade ago, oil provided nearly 39% of total global energy supply. Oil’s now down to 33%, and heading to 32% either this year, 2013, or by next year.

We would not say that the global economy is currently at high risk of losing its access to coal. So we should no longer be overly concerned that the global economy is going to lose its access to oil. It has already lost its access to cheap oil. And now coal, not oil, is in position to take the lead as the number one energy source, globally. But there is little room for complacency in this regard. Because there is little good news in this lower tail risk from oil and its lower-level threat to the global economy. Rather, the global economy is growing increasingly imbalanced.

MacDonald also looks at a decline in capital investment across society, leading to underinvestment and unemployment, and contrasting this with the high investment in energy extracting technologies. His conclusion from this is also consistent with Peak Oil:

"...a larger and larger proportion of total investment needs to be devoted now to natural resource extraction, leaving less investment to other areas. The net energy available to society is in decline.

But it’s not just the private sector that has stopped investing. Public sector levels of investment have been dropping as well. In fact, according to yet another dump of recent data, U.S. government investment in public infrastructure is at the lowest levels since WWII..."

And although not included in the article, we see that "growth" in the west is largely coming via these sources 1.) Pushing worker's salaries, benefits and living standards ever lower 2.) Financialization, i.e. creating virtual money via gambling, derivatives and so on, 3.) Global wage arbitrage between the developing world and the West, 4.) Asset bubbles and inflated stock prices, 5.) Crony capitalism, lobbying, and the revolving door, for example the defense and private prison industries, 6.) Corruption; milking the system for money, purchasing politicians to undo regulations and go after government contracts and subsidies, and so on, .) 7Consumer debt and usury, and 8.) Rent-seeking, i.e. privatizing publicly built assets as communities go bankrupt and turning them into permanent revenue streams. This goes hand-in-hand with demonization of government (which is easy to do when government is corrupt - it becomes a self-fulfilling prophecy). In other words, even the weak single-digit growth in countries like the US accrues entirely to the investor class, with most citizens actually becoming worse off!

This is one reason why I think the role of oil in our economic troubles is somewhat exaggerated. It's also why throwing up our hands and saying "well, Peak Oil..." or expecting some sort of fast crash or collapse to restore sanity to our decaying societies is probably not a good course of action.

Conclusions:

I would ague that much of the collapse/Peak Oil scenario is being playing out, just not exactly the way in which it was predicted (which is obvious). Some scenarios, however, have been off base. This is because:

1.) We have gone after other sources of hydrocarbons that have made up the gap. This has allowed economic growth to continue (as measured by energy usage) worldwide, in the face of economic stagnation in the previously industrialized world. However, this has two consequences 1.) the continued rapid depletion and pollution of the natural world, and 2.) anthropogenic climate change. Continued economic growth will only worsen these from a systems perspective. Fuel will now be very expensive, but extreme inequality means the lifestyles of the richest will not change, and may continue to improve, while the living standards for the majority deteriorate, in some cases to pre-industrial levels

2.) Financial and monetary policies have prevented a worldwide economic crash of Great Depression proportions in many countries (Greece and some others excepted). This has meant a decline in living standards slow enough that it can simply be ignored and written off by those in authority. This is done by simply calling it "the new normal," blaming the poor and unemployed victims as the instigators of their own plight (not enough education, no moral fiber, lazy, etc.) or dismissing it as a temporary blip and saying things will "get back to normal," once the debt is paid off. By using these extend-and-pretend techniques, politicians can forever avoid formulating a coherent response to the crisis. I would argue - wait another 40 years or so, and the worst predictions of Peak Oil will have largely come true (crumbling cities, mass unemployment, deteriorating infrastructure, broke governments, rampant poverty, political repression, militarized police, voter disenfranchisement, corruption, gridlock, cannibalization of previous investment, technological stagnation, and a general inability to get things done effectively).

Much like the Y2K scenario, as knowledge of the problem spread and our backs were against the wall, we took steps to deal with the situation and keep it from coming to a head. As some commentators have pointed out, a lot of Peak Oil collapse scenarios relied upon existing authorities and institutions standing by helplessly and watching rather than taking action - a rather unrealistic assumption. A lot of commentators also drastically underestimated the resilience of the capitalist/industrial economic system. Given the fact that it has managed to survive thus far, that also seems like a significant oversight. It must be noted that, however, other rosy scenario predictions have also proven to be equally as wrong, including predictions of eternally rising stock and housing prices, or predictions of better living standards in perpetuity thanks to technological innovation.

Some of the more drastic predictions made by Peak Oil "doomers," such as a mass return to agricultural labor, a total collapse of civil order, ATMs running out of cash, supermarkets running out of food, or gas pumps running dry, have not borne out (again barring exceptional events like hurricane Sandy and places like Greece and Syria). It's hardly a World Made by Hand out there. However, I would argue strenuously that ten years ago, if you wanted to know what the shape of the world would be today, paying close attention to the Peak Oil or "doomer" narrative would have gotten you much closer to the truth than listing to any other source, especially the "mainstream" media, economists and politicians.

With that said, it's best to move into the future testing the theory against reality and continually revising against what we actually see based on the data. That will allow us to make predictions for the next ten years that will hopefully be again more accurate than what we are being fed by the media and the authorities.

4 comments:

great analysis. Just read William Ophuls' "Immoderate Greatness: Why Civilizations Fail". Nice book.Civilizations fail gradually/gracefully until they don't.Thus far, the decline has been gradual. That will continue... until it doesn't.

Brilliant writing. I appreciate the research that went into this post and encourage you to post annual updates on the post peak oil world. Did anyone expect the oil glut and low price of gas here in 2016?

I think everyone in Peak Oil circles predicted gas prices would rise in perpetuity forever bringing the economy to its knees. This was the commonly-held proposition of Peak Oil.

Clearly, that didn't happen.

Now, some are predicting that Peak Oil actually means *cheap* oil, which seems like a retroactive change. If your theory does not have predictive power, clearly there were problems with it. You can't go back and change the rules. And when I say Peak Oil theory, here I'm referring specifically to those who made very specific claims about what the world would look like post-peak (you know who I'm talking about).

What happened? Reality is more complex. The basics are, the Saudis left the spigot open to short-circuit the fracking boom. Meanwhile, the middle-class in the U.S. was destroyed by greedy plutocrats, and their backup engine--China--started sputtering and stalling. This led to a glut. So you have the Saudis trying to shut down fracking/photovoltaics even as the global economy is tanking, meaning cheap oil so long as as the economy continues to sputter and the Saudis can keep the spigot open.

Looking at the history of oil prices, the thing you realize is that 1.) Oil prices reflect only a current situation, and have nothing to do with the long term. It's only supply and demand *at that moment.* So you can have cheap oil even after peak. 2.) Supply and demand are always trying to sync up and not making it, despite years of attempting to come up with ways to do that. This leads to all sorts of price spikes and gluts, which are always going on.

Bottom line: the oil situation is far more complex than some make it out to be. It's not a linear path to collapse. But since cheap oil requires an economy to be sputtering to make it cheap, that's hardly good news.